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This expert thinks the oil price could surge to US$196 a barrel in 2021

man holding up barrel of oil against rising chart representing rising oil search share price
Image source: Getty Images

ASX oil-exposed stocks are the worst performing group on the market this morning, but this could change in 2021.

The energy sector tumbled 1.3% when the S&P/ASX 200 Index (Index:^AXJO) slipped 0.4% at the time of writing.

The Brent crude oil price tumbled 1.7% overnight to US$47.80 a barrel, while the WTI benchmark fell by a similar amount.

ASX energy stocks retreat as oil prices slide

A retreat in the commodity is triggering this bout of profit-taking on ASX energy stocks. The Oil Search Ltd (ASX: OSH) share price crashed 3.6% to $3.66 and the Beach Energy Ltd (ASX: BPT) share price lost 2.7% to $1.79.

This makes them the third and fourth worst performers, respectively, on the ASX 200 this morning.

But the Woodside Petroleum Limited (ASX: WPL) share price and Santos Ltd (ASX: STO) share prices aren’t too far behind. They’ve each lost more than 1% of their value.

Is the pullback in the oil price a buying opportunity?

These stocks have enjoyed a big bounce recently as speculation of the impending arrival of COVID‐19 vaccines fuelled optimism of an economic recovery.

But the pullback in ASX energy stocks could present a buying opportunity as Credit Suisse believes oil is heading higher.

The broker created a proprietary model that explains 86% of the Brent price variation since 1993 by looking at demand and supply drivers. This model is based on a range of factors like industrial production, ISM new orders index, world oil production and capacity utilisation, just to name a few.

Why oil can hit US$196 a barrel

Even under a more pessimistic scenario, the model is pointing to much higher oil prices. And under the best-case outcome, the Brent price could rocket to a new record high.

“If the Organization of the Petroleum Exporting Countries (OPEC) maintains agreed production cuts, the model points to an oil price of US$196 per barrel!” said Credit Suisse.

“If OPEC production returns to pre‐pandemic levels, fair value falls to US$80 per barrel.

“Even accounting for additional risks, such as inventory build, lack of storage space and political uncertainty, we can see oil prices returning to pre‐pandemic levels of US$60‐65 per barrel if world IP [industrial production] does not collapse or even recovers.”

Economic growth looking like a good bet for 2021

There’s little risk that industrial production will crash. If anything, experts are confident that economic activity will rebound in 2021 as it looks increasingly likely that a successful vaccine will be found.

The question is how quickly it can be made available to the general public. But as long as there’s a viable treatment for COVID, there will be enough business and consumer confidence to reflate the global economy, even if the vaccine takes a little longer to become available.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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